ETF Essentials

Exchange Traded Funds (ETFs) are the newest flavor on the investment board today. Ironically, those who snickered at the lack of "adventure" offered by an index fund are now lining up to buy the stock

equivalent. Established in 1993, ETFs present investors with an interesting hybrid of index mutual fund and common stock. They follow an index such as the S&P 500 but are easily tradable on a stock exchange.

The advantage of having instant diversity in one purchase on the stock exchange is appealing to many investors. And, in the fast-paced world, ETFs can also be traded instantly at real-time rates, unlike mutual funds, which trade at the net asset value (NAV) set the previous day. While the purpose of mutual funds is not day trading, that option is available for an ETF investor should there be a significant shift in the market. Other similarities to stocks include the fact that an ETF can be bought on margin and traded using a stop order or limit order, which lets investors specify the price points at which they are willing to trade. ETFs are also more liquid than mutual funds.